S&P places CME Group debt ratings on CreditWatch

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The debt ratings for futures and commodity exchange owner CME Group Inc. are under review, Standard & Poor's Ratings Service said Thursday, after the company announced a new class of securities clearing membership, which analysts said could increase risk for the company.

CME Group is the parent of the Chicago Mercantile Exchange, Chicago Board of Trade and other markets. Its counter party credit ratings, which remain at investment grade AA for long-term credit and A-1+ for short-term credit, were placed on "Credit Watch Negative" status by S&P analysts.

The action follows CME Group's announcement that it has introduced a new class of clearing membership -- Financial Instruments Clearing Membership -- for exchange customers that conduct proprietary trading of listed interest rate products. The members currently clear transactions through a member of CME Clearing, the clearinghouse division of the Chicago Mercantile Exchange.

S&P analysts said they are concerned the program weakens the clearinghouse's financial safeguard system.

The concern is that the new members could obtain margin relief for Eurodollar and U.S. Treasury futures contracts traded on the exchange. To do that, they would need to utilize a facilities manager to provide CME Clearing a view of the member's holdings of eligible securities.

"We are concerned there could be incremental operational risk because CME Clearing would not have direct control of the cash securities for which it is granting margin relief. Instead, it shifts this responsibility to the facilities manager," S&P analysts said.

A default could fall upon the facilities manager. To cover this possibility, Chicago Mercantile Exchange is contributing an additional $100 million of surplus funds to its financial safeguard package.

The S&P analysts said they view that as a step toward spreading risk further at CME Clearing.

The company is introducing the new program in anticipation of a potential competitive threat from New York Portfolio Clearing, a joint venture between Depository Trust & Clearing Corp. and NYSE Euronext, S&P credit analyst Charles D. Rauch said in a statement.

S&P analysts plan to gather additional information on the CME processes and how it will monitor securities holdings. They also will assess the competitive threat and whether it could hurt trading volume of CME's listed interest-rate products and the group's financial performance.

The analysts also placed the $612.5 million of 4.4 percent notes due 2018 issued by CME Group Index Services LLC and guaranteed by CME Group Inc. on "CreditWatch Negative."

Shares of CME Group rose $7.40, or 2.4 percent, to $311.45 in afternoon trading.